Yearly Archives: 2024

Activism Vulnerability Report

Posted by Jason Frankl, Brian G. Kushner, and Robert J. Kueppers, FTI Consulting, on
Thursday, May 9, 2024
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Jason Frankl and Brian G. Kushner are Senior Managing Directors and Robert J. Kueppers is Senior Advisor at FTI Consulting. This post is based on a FTI Consulting memorandum by Mr. Frankl, Mr. Kushner, Mr. Kueppers, Kurt Moeller, Tom Kim, and Ryan Chiang.

Introduction

A resilient U.S. economy, with inflation cooling from 2023 levels and interest rates likely peaking, can provide a favorable backdrop for shareholder activism and M&A in 2024. Activist activity was strong in 2023 and there are clear signs that momentum has carried into 2024. We could see activism and M&A activity ramping up over the coming months, as companies seek growth opportunities, and based on the results of our proprietary screener, the most vulnerable industries are Utilities, Airlines & Aviation and Media & Publishing.

In this issue of the FTI Activism Vulnerability Report, we offer more insights, analysis and commentary, including sections on high profile activist campaigns involving Disney and Starbucks. As with prior reports, we provide key trends in activism campaigns. READ MORE »

Primer on Corporate Political Spending for Incoming Directors

Posted by Bruce F. Freed, Jeanne Hanna and Karl Sandstrom, Center for Political Accountability, on
Wednesday, May 8, 2024
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Bruce F. Freed is President and Co-Founder, Jeanne Hanna is Research Director, and Karl Sandstrom is Strategic Advisor at the Center for Political Accountability. This post is based on their CPA memorandum.

Over the past year, several corporate executives have expressed a concern to the Center for Political Accountability that new members of corporate boards often lack a broad knowledge of corporate political spending and what it entails. They saw this as impairing new directors’ ability to set political spending policies and conduct the due diligence required to protect their company, especially in today’s risk fraught political environment.

They asked that CPA fill the gap. Our recently released Primer on Corporate Political Spending for Incoming Directors does so. As has been the case with the Center’s previous works — the Guide to Corporate Political Spending and the Guide to Becoming a Model Code Company, the Primer reflects the input of corporate executives and directors to ensure that it is a practical guide for discharging a director’s responsibility for overseeing the company’s political engagement.

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The Missing “T” in ESG

Posted by Danielle Chaim (Bar-Ilan University), and Gideon Parchomovsky (Hebrew University of Jerusalem), on
Wednesday, May 8, 2024
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Danielle Chaim is an Assistant Professor at Bar-Ilan University Faculty of Law, and Gideon Parchomovsky is Wachtell, Lipton, Rosen & Katz Chair in Corporate Law at the Hebrew University of Jerusalem and Robert G. Fuller, Jr. Professor of Law at University of Pennsylvania Carey Law School. This post is based on their recent paper.

In recent years, environmental, Social, and Governance (ESG) investing has reached unprecedented heights. Investors are pouring billions of dollars into funds, prioritizing companies with strong environmental records, positive social impact, and good corporate governance. Proponents of ESG investing hail it as a win-win strategy that promises higher financial returns while addressing pressing global challenges like climate change and social inequality. With a risk of a slight exaggeration, the ESG movement often depicts corporations—and, by extension, institutional investors as their largest shareholders—as modern-day saviors of the world, offering a pathway to a better future. ESG rating agencies rank public corporations based on various ESG indicators, bestowing bragging rights on those with the highest scores, allowing them to attract more investments.

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Delaware’s Status as the Favored Corporate Home: Reflections and Considerations

Posted by Amy Simmerman, William B. Chandler III, and David Berger, Wilson Sonsini Goodrich & Rosati, on
Wednesday, May 8, 2024
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Amy Simmerman, William B. Chandler III, and David Berger are Partners at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini memorandum by Ms. Simmerman, Mr. Chandler, Mr. Berger, Brad Sorrels, and Ryan Greecher and is part of the Delaware Law series; links to other posts in the series are available here.

In recent months, a conversation has emerged as to whether Delaware should remain the favored state of incorporation for business entities. Indeed, many of our clients have asked us whether they should remain in Delaware or choose Delaware as the state of incorporation for their new ventures. In this discussion, we provide our reflections on that question and various factors that entrepreneurs, investors, and companies should consider when weighing incorporation in Delaware against incorporation in another state.

The Reliance on Delaware Compared to Other States

The sheer number of entities formed in Delaware reflects its dominance in this area. In 2022, more than 313,650 entities were formed in the state of Delaware, resulting in more than 1.9 million entities total in Delaware.[1] Delaware also continues to be the state of incorporation for nearly 68.2 percent of the Fortune 500, 65 percent of the S&P 500,[2] and approximately 79 percent of all U.S. initial public offerings in calendar-year 2022.[3] Of course, those numbers reflect that a substantial portion of entities are incorporated elsewhere, both within and outside of the United States. The Chief Justice of Delaware’s Supreme Court has noted that business entities indirectly or directly generate about a third of the state’s revenue.[4]

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Stakeholder Governance and the Eclipse of Shareholder Primacy

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, May 7, 2024
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Martin Lipton is a Founding Partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Kevin S. Schwartz.

For decades, advocates of “shareholder primacy” as the North Star of corporate governance have steered our leading corporations and our Nation’s economic engine perilously off-course. Since the 1970s, when the work of Milton Friedman, Michael Jensen, and Frank Easterbrook took hold in business schools, activists and raiders in high-profile proxy fights and hostile takeovers on Wall Street have wrapped their arms around the shareholder-primacy narrative to advance their own short-termist objectives. Far from shared scholarly interest, their objective was plain: To justify cutting off directors’ reasoned judgment, in favor of maximizing short-term shareholder value, notwithstanding the attendant harm to the health of our corporate and economic landscape and even our national security. To be sure, some in academia and in the corporate world fought back, in favor of responsible corporate stewardship in pursuit of long-term sustainable value, by advocating consideration of other stakeholders who make essential contributions to the creation of sustainable value. And the 2008 financial crisis alerted others to the dangers of the shareholder-primacy paradigm. But until recently, shareholder primacy remained stubbornly ascendant, largely crowding out other voices. Even the Business Roundtable, which officially adopted shareholder primacy in 1997, did not recognize its existential threat to society and abandon it for stakeholder corporate governance until 2019.

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The Shareholder Franchise, Transformative Investor Changes, and Motivational Misalignments

Posted by Henry T. C. Hu (University of Texas) and Lawrence A. Hamermesh (Widener University Delaware Law School), on
Tuesday, May 7, 2024
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Henry T. C. Hu is the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School, and Lawrence A. Hamermesh is an Emeritus Professor at Widener University Delaware Law School. This post is based on their recent paper.

“The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.” In the generation since Chancellor William Allen’s soaring rhetoric in Blasius, the “transcending significance” of the franchise has become corporate governance catechism. His hope, if not expectation, was that the rise of the institutional investor would help the franchise transition from an “unimportant formalism” to an importance of source of discipline.

This catechism has motivational alignment as its foundational premise: a shareholder’s economic ownership will generally motivate her to use the associated voting rights to promote share value. Implicitly, the premise assumes that the voting rights and the economic rights of share ownership are inextricably linked—i.e., are “coupled.” Transformative institutional investor changes are increasingly undermining the premise, animated in large part by an accelerating, but insufficiently recognized, severing of that link—“decoupling.”

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SEC and NAM appeal decision holding proxy advisor rule amendments unlawful

Posted by Cydney Posner, Cooley LLP, on
Tuesday, May 7, 2024
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Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

You probably remember the saga about the SEC’s rules regarding proxy advisory firms? Back in 2019, the SEC issued interpretive guidance that proxy advisory firms’ vote recommendations were, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9.  (See this PubCo post.) That guidance led ISS to sue the SEC and then-SEC Chair Jay Clayton. SEC rules codifying that interpretation were adopted in 2020.  ISS amended its complaint, contending that the interpretation in the release and the subsequent rules were unlawful for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” was contrary to law, that the SEC failed to comply with the Administrative Procedure Act and that the views expressed in the release were arbitrary and capricious. The National Association of Manufacturers, which favored the 2020 amendments, intervened on the side of the SEC (and also became a defendant).  Over four years later, in February 2024, the DC District Court held that the SEC’s rules regarding proxy advisory firms were invalid, stating that the “SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.” (See this PubCo post.) Now, both NAM and the SEC have filed notices of appeal with the DC Circuit.

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M&A Developments: Hedge Fund Activism

Posted by Igor Kirman, Victor Goldfeld, Elina Tetelbaum, Wachtell Lipton Rosen & Katz, on
Monday, May 6, 2024
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Igor Kirman, Victor Goldfeld, and Elina Tetelbaum are Partners at Wachtell Lipton Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Kirman, Mr. Goldfeld, Ms. Tetelbaum, Zach Podolsky, Ryan McLeod and Noah Yavitz.

Hedge Fund Activism

a. The Activism Landscape

Recent years have consistently seen elevated levels of activity by activist hedge funds, both in the U.S. and abroad. Such funds often seek the adoption of corporate policies that would increase short-term stock prices, such as increasing share buybacks, selling or spinning off one or more businesses of a company or selling the entire company. There has been a resurgence of activism activity after the temporary drop during the Covid-19 pandemic; 2023 saw a 9% increase in global activism campaigns compared to 2022, which itself saw a 38% year-on-year increase in the number of campaigns launched in 2021. Approximately 17% of S&P 500 companies have a known activist holding more than 1% of their outstanding shares. Activists’ assets under management (“AUM”) have grown substantially in recent years, with the 50 most significant activists ending 2023 with approximately $156 billion in equity assets. Matters of business strategy, operational improvement, capital allocation and structure, CEO succession, M&A, options for monetizing corporate assets, stock buybacks and other economic decisions have also become the subject of shareholder referenda and pressure, with operational matters attracting particular attention amid the ongoing economic uncertainty. Hedge fund activists have also pushed for governance changes as they court proxy advisory services and governance-oriented investors, particularly as they seek board representation, often through one or a few board seats or, in certain cases, control of the board. Activists have also increasingly targeted top management for removal and replacement by activist-sponsored candidates. In addition, activists have worked to block proposed M&A transactions, mostly on the target side but sometimes also on the acquiror side, with the goal of either sweetening or scuttling the transaction. READ MORE »

Next-Gen Governance: AI’s Role in Shareholder Proposals

Posted by Arnaud Cavé and Niamh O’Brien, FTI Consulting, on
Monday, May 6, 2024
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Arnaud Cavé is a Director and Niamh O’Brien is a Senior Consultant at FTI Consulting. This post is based on their FTI memorandum.

With AI continuing to captivate businesses, consumers and regulators, institutional investors are also increasingly focusing their attention on the implications for the businesses in which they invest. In our Responsible AI Governance white paper published in January 2024, we highlighted the risks to businesses and wider society of AI, provided an overview of regulators’ and investors’ responses, and proposed a governance framework to manage these risks. One topic covered in the report that is gaining traction is the emergence of shareholder proposals urging companies to disclose more information on the risks associated with  the deployment of AI and their efforts to mitigate them.

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Innovation: The Bright Side of Common Ownership?

Posted by Mireia Giné (IESE Business School), on
Monday, May 6, 2024
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Mireia Giné is Professor of Finance at the IESE Business School. This post is based on a recent paper by Prof. Giné; Miguel Antón, Florian Ederer, and Martin Schmalz.

The common ownership hypothesis has ignited a debate among scholars, policymakers, investors, and other industry stakeholders about the impact of widespread diversified investment on corporate competition. Central to the debate is the claim that when large investors such as asset management companies have significant stakes across competing firms within the same industry, they might dampen competitive incentives. Common ownership can lead companies to refrain from aggressive competitive strategies like price cutting or increased innovation, as these actions could harm the profits of their rival firms, which are also part-owned by the same institutional investors.

Proponents of the common ownership hypothesis suggest that this phenomenon could explain some puzzling trends in the economy, such as reduced business dynamism, elevated profit margins, and diminished consumer surplus. However, critics challenge these interpretations, arguing that the empirical evidence linking common ownership to anticompetitive behavior is not definitive and ignores the impact that common ownership may have for firms competing across multiple industries and for corporate innovation. They caution against regulatory interventions that could disrupt the investment landscape without clear proof of harm. This debate has not only academic implications but also practical consequences, influencing how markets are regulated and how corporate strategies are formulated. Our research dives deeper into this complex issue, exploring how common ownership affects corporate innovation across the U.S. economy.

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